Most state Medicaid agencies are turning to capitated prepayment to reduce costs, to improve access to care, and to increase efficiency in the provision of services. However, many states have concerns about the financial incentives that accompany prepaid care could affect services to chronically ill beneficiaries. Medicaid agencies are implementing a variety of pre-payment strategies specifically for children with chronic conditions, ranging from service exclusion to allowing voluntary enrollment in prepaid health plans. Several of these strategies are intended to reduce financial disincentives to providing adequate care. How providers respond to capitated prepayment for services to chronically ill and disabled children is a significant consideration for children and their families, for the outcome of Medicaid managed care expansions, and for policy-makers who expect prepayment policies to control costs. This project takes advantage of a natural experiment to examine financial incentives of a "carve-out" policy for Title V-eligible children with chronic disabling conditions. This reimburse policy employed in California's managed care expansion could motivate cost shifting from capitated care to the carved-out services. Medicaid claims covering the pre and post carve-put periods (1994-1997) will be analyzed using a difference-in-difference model with control group comparisons. Specific objectives are to evaluate how "carving-out" specialty services during a managed care expansion affects total Medicaid costs; to determine whether the financial incentives of a carve-out policy increase case-finding of children with specific Title V-eligible conditions; and to use qualitative interviews with Title V agency administrators to model and to interpret cost and enrollment changes.